Are Real Estate Commissions too High?
For as long as I’ve been in the real estate business, agents have forever been faced with defending their fees. Comments like, “That’s unbelievable”, “I’ll never pay that much”, “You guys charge ‘way too much”, have become the most frequently discussed issues between sellers and agents.
After 40 years of defending my fees, I now get a chance to air my frustrations publicly and let the world (hopefully this paper gets worldwide distribution) know where all the money goes.
First, let me say that federal law requires that there can be no effort to fix commission rates. That is to say, that a coalition of brokers cannot agree to a ‘standard’ rate for a geographic area (i.e. Marco Island). Further, the law dictates that a local organization cannot state or imply a specific rate for agents in the locale. However, a specific office or individual may have a policy stating his ‘standard’ rate.
During my tenure, I have come across many sellers who seem more concerned about how much I earn, than how much they put in their pockets. On the other hand, I have had many clients who gladly paid my fee because of the significant return they realized or the guidance they received during the selling process. In reality, some professional agents, while charging a higher fee will generate a higher net to the seller. When was the last time you questioned your attorney’s fee or that of your doctor after a successful surgery?
Let’s look at what happens to that ‘unbelievable’ fee. The typical fee may range from 3% to 7%, depending on the price of the property, the effort required (by seller), the agent’s commitments and some other circumstances. Let’s look at a specific closing.
While we could take any sales price, for simplicity I’ll use $400,000 and a fee of 5% (my fee is more but not an easy calculation; and I don’t have a calculator handy). That comes to $20,000; “Unbelievable”! Now, let’s look at who gets what. Generally there is a ‘listing’ office and a ‘selling’ office and they share the fee equally: $10,000 each. Now let’s look at what happens to these funds.
While there is no normal agent/broker split, I’ll use a 75/25 ratio (another easy calculation). With the broker (office) receiving $2,500 (the small share), the broker must pay the rent, utilities, support staff and a host of other expenses related to operating a real estate firm. Depending on the number of sales, there may be a profit or there may be a loss. Because of the low number of transactions over the past few years, nationally and locally, many offices have had to close their doors. Now I know this is a tear jerker, but many of these brokers were former agents who promoted themselves to a level beyond their capability and should have gone back to the sales staff years ago.
On the agent’s side of the financial equation is the sum of $7,500; “Unbelievable”. What a lot of money for one sale! Wait a minute: I think that we need to see if that’s the agent’s net. Let’s assume that the agent needs a nice automobile to take customers to properties. Most customers frown at the suggestion of a bicycle (tandem of course) ride to view a house or even the sidecar of a motorcycle; picky, picky, picky. To be successful, an agent must also invest in marketing himself and the properties he represents (very expensive). What about fuel and servicing for the car, computers, cell phones, support personnel, and materials?
Whatever the agent has left after business expenses, he or she probably has a mortgage and house expenses. He may even want to feed the kids, clothe them, and occasionally treat them to an ice cream cone.
Now before you break down into a sobbing session, let’s look into the local real estate statistics (compliments of the Marco Island MLS). For the year ending December 31, 2009, there were 994 closed transactions (houses and condos) and 638 agents to share the pie. That equates to an average of approximately 1 1/2 sales per agent.
Now you can cry for those who need to sell something – and fast; and let’s hope that the local agents don’t read this article. If they discover that they can’t afford to survive with their ‘low’ fees, they may want to petition the feds for some of the stimulus package and then we can all pay to support our poor fellow realtors.
Once your sobbing has ceased, raise your glass to the future. My cloudy crystal ball is beginning to clear and the future is looking brighter.
Marv Needles is the broker/owner of ERA Flagship Real Estate which he founded in 1973. He has been a full time resident of Marco Island for over 40 years.